Los Angeles, California-based insurer Mercury General expects gross losses from the January 2025 wildfires to amount to $1.6 billion to $2 billion, and net losses of between $155 million and $325 million, with the insurer yet to decide whether to designate the Palisades and Eaton fires as one or two events.
As part of its Q4 and full year 2024 results, Mercury has provided an update on the devastating California wildfires.
The company explains that its net loss estimate range is based on the size of the gross loss, subrogation recoverability for the Eaton fire, and whether Mercury decides to have the wildfires be one or two events.
Currently, Mercury estimates that 55% to 60% of losses are from Palisades and 40% to 45% are from Eaton.
As of February 7th, 2025, Mercury has paid out $800 million related to the wildfires, primarily for contents, dwelling limits and living expenses, and has sent an initial billing to its reinsurance partners and has collected $500 million to date.
The insurer reiterates that it has catastrophe reinsurance in place that provides $1.29 billion of limit on a per-occurrence basis after covered cat losses exceed its $150 million retention.
Additionally, the firm has up to $20 million of coverage on a property excess of loss reinsurance treaty available to offset losses exceeding $5 million per property that attaches before the catastrophe limits, and Mercury states that it anticipates using round $10 million to $20 million of those limits for claims related to the fires.
The company also explains that on its cat reinsurance programme, “one percent of the reinsurance limit of the $650 million xs $650 million coverage layer was placed as parametric coverage that pays out based on industry insured values in pre-determined grids within the fire footprint and the Company’s participation percentage within that grid.”
However, Mercury has determined that this parametric portion of its reinsurance coverage is not eligible for recovery, meaning that, $6.5 million of the $1.29 billion of total reinsurance limits does not qualify for either the Eaton or Palisades fires.
Regarding subrogation, the insurer notes that it is engaged with legal counsel in pursuit, particularly on the Eaton Fire.
“In several previous wildfire events caused by utility company equipment, we sold our subrogation rights, but we have not determined whether we will do so with the Eaton event,” says Mercury.
On the California FAIR Plan, the Los Angeles insurer confirms that it is a member, but adds that between the coverage afforded by reinsurance and the ability to recoup a portion of the assessment, it does not expect the FAIR plan assessment to materially add to the net wildfire losses from these events.
Mercury also reported: “Catastrophe losses from the Wildfires, net of applicable reinsurance benefits, and if applicable, subrogation, will be recorded as part of losses and loss adjustment expenses in the Company’s consolidated statements of operations for the three-month period ending March 31, 2025. To the extent that losses are reinsured, the reinsurance program calls for reinstatements of limits to cover future events. If the full $1,290 million limits are used up, then the total reinstatement premium would be $101 million. Reinstatement premiums will be charged evenly over the first and second quarters of 2025.”
As noted previously, Mercury’s catastrophe reinsurance treaty allows for the combining of events that occur within a 150-mile radius as a single occurrence.
“The Company has not yet determined if it will consider the Wildfires as two separate events. As more information becomes available to the Company, including any subrogation potential, the Company will evaluate whether it will consider the Wildfires as two separate events,” says Mercury.
Going on to explain: “Under a single-occurrence scenario, the Company will retain the first $150 million in losses and up to $6.5 million of losses for parametric coverage not eligible for reinsurance coverage. Gross losses in excess of $1,440 million ($150 million retention plus $1,290 million reinsurance limit), if any, will be retained by the Company. In addition, the Company is responsible for up to $101 million in reinstatement premiums.
“Under a two-event scenario, the Company may elect to use reinsurance limits of up to $1,290 million for the first event and reinstated limits up to $1,238 million for the second event. In this scenario, the Company would be responsible for the first and second event retentions of $150 million each, up to $6.5 million of losses for parametric coverage not eligible for reinsurance coverage for the first event and co-participation in losses for the second event equal to 8% of losses in excess of $650 million up to $1,300 million. In addition, the Company would be responsible for up to $101 million in reinstatement premiums. The Company may seek to acquire additional reinsurance if reinstated limits are used by the second event, for the stub period ending on June 30, 2025, the expiration date of the current contract.”
